Big banks' legacy IT systems could kill them

Failure to value technology

Part of the problem is that banks fail to understand the value of technology today, says Skinner.

He says banks have a mistaken view of technology. “Banks in the last century all held the view: ‘If ain’t broken, don’t touch it.’ So they had all these core processing systems for deposit accounts and payments that, once built, were never touched again. They were just maintained.”

This made sense in the past, because building core processing systems cost a lot of money, in terms of development and hardware. “Over the years, the systems were cemented in place by new developments around them, such as ATMs and callcentres. By the time the internet came around, the cement was so thick that internet banking was just added making the cement more like granite rock. That’s the problem: breaking apart the granite foundations of the banks’ technology base and replacing it, without any impact on performance or processing.”

If banks do not replace these foundations in the light of digitisation they leave themselves open to competitors. “They will look Victorian by comparison to new competition or banks that have systems fit for purpose,” says Skinner.

Daniel Mayo, analyst at Ovum, agrees that banks do not really understand what technology means to the business. “It varies by bank, but the business view of IT remains traditional in many banks, where IT is seen as a supplier/utility rather than partner/part of core business.”

An industry source says banks have forgotten that IT is the bank these days, not a commodity you can pass to another firm. “Many customers only interact with their bank via technology, so it is in fact core to the bank's offering and service,” he says.

Senior business management often think IT is a complex and expensive thing, which they would prefer to do without in an ideal world. “This totally misses the point in the market today,” he says.

This opens the way for startups to get into banking products via technology and erode market share for the big banks. Firms such as Wonga, Pounds to Pocket, Currency Cloud may be in niche products today, but they have the ability to break into mainstream products as they grow.

The IT outages at RBS have stirred the regulators, but will this lead to real change. He says RBS’s problems have woken banks to the problems they face.

"When RBS had problems last year, the regulators contacted other banks," he says. "We had to provide statements and evidence to show how we would not suffer a similar fate."

Jean-Louis Bravard, director at Burnt-Oak Partners and former CIO at JP Morgan, said UK banking IT faces major challenges. "Bank IT in the UK is not OK,” he says.

“Banks rely on obsolete legacy IT surrounded by an ever-increasing plethora of newer systems to give consumers the impression that the banking systems are fit for purpose in our internet and smartphone world.”

Approaches to legacy refresh

Skinner at the Financial Services Club says banks are engaged in legacy refresh but are highly cautious. 

“Most are working on it and have been for years. The issue however is that they shoot for the lowest common denominator," says Skinner.

"Take the HBOS integration with Lloyds. To ensure the lowest risk path, Lloyds migrated HBOS to their core system, rather than take the risk of replacing a core system. The result was that they have a very reliable, lo-tech processing unit built in the last century servicing both banks. Nationwide took a different approach and replaced their core, using Accenture and SAP. The result was a big risk project that consolidated multiple, fragmented, last-century solutions. They achieved the result, but it involved a lot more time, effort and cost than they ever anticipated.”

Daniel Mayo, analyst at Ovum, says banks have their work cut out replacing legacy systems. “They need to modify systems to support both compliance demands and new services (particularly mobile), however, knowledge of old systems is declining due to retirement of workforce with system experience.”

Could the regulators do more to spur banks into action without making matters more complicated? The banking IT source says the regulators are trying to do this, but often make hard work of it. “They are onsite, very invasive, they have lots of questions and data being requested all the time. They are doing what they can, but they are not necessarily hitting the right spots. They are in fact putting an extra strain on IT management time which should be spent on fixing problems.” 

Will competition drive IT improvements? Reputation could drive improvements as customers gradually move away, if a bank becomes known for poor IT and reliability. “I dropped RBS/NatWest Bankline, for example, as it was expensive and offline a few days most weeks. It looked like 1970s technology when it actually ran and was horrible to use,” said one consumer.

Consumers today use web-based services, which are trusted and have good IT, every day. If services such as PayPal, eBay, Amazon, Facebook and Twitter moved into banking, they would attract customers. Their systems already contain details about people and businesses and handle transactions and money.

So could 2014 be the time when legacy systems go?

“Not a chance,” concludes the anonymous senior IT professional Computer Weekly spoke to. “Too expensive, too difficult, other priorities, no budget, and the legacy systems actually work (subject to human error of course). Yes, there will be a few cases, but I don't expect a trend from what I know of budget priorities. Main focus is around risk, compliance, security, regionalisation, regulation and some new business requirements.”

Role of outsourcing in bank IT failures through the eyes of a banking professional

"I actually think the so-called legacy systems are the good quality, proven systems," says an anonymous senior IT professional. "They've been around a long time and survived the test of time. It's the new, quick, cheap software that worries me more. However, as legacy systems support is prime for outsourcing and offshoring, the skills and knowledge disappear and a firm is left unable to work on its legacy systems or jump in and fix them if they go wrong. It becomes totally reliant on external providers, who may have higher priorities or maybe even suffering tension of contractual, service level or payment issues. I don't feel this is so much of a technical issue – developers can solve those – it's more of a management, cultural, structural and outsource issue.

"I don't think too much pressure on systems is the problem. Most of the issues I've seen have been due to human error, equipment failure or in recent years errors made by outsourced firms who are more distant than they were historically. More work has gone abroad as a result of cost pressure and that has led to a drop in standards across the industry. Outsourcing and offshoring development didn't hurt production, but now that more production support is both offshore and outsourced, the scope for live problems is much higher than a few years ago. All too often problems arise from human error, by a junior person at a third party somewhere half way round the world, who did not understand or follow a process properly.

"In my opinion it is because far more has been offshored and outsourced and internal expertise and care has been eroded. In the effort to commoditise IT and reduce the cost, these large firms have forgotten that quality, expertise and enthusiasm is needed close to hand. The systems are also very complex, tangled up and it is beyond the capability of any individual to make a major impact. There is so much bureaucracy, governance, process, control applied internally in all firms that getting anything done can be a challenge. Even getting budget and approval to do regulatory projects can be difficult."